Euro woes to spread via credit

November 25, 2011

James Saft is a Reuters columnist. The opinions expressed are his own.

A sharp cut back in lending by euro zone banks in their scramble to raise capital will prove an important channel spreading pain from the vulnerable single currency area to the rest of the world.

Though the euro-induced credit crunch will be less important than the outright effects of the euro zone recession, in some areas, like trade finance, and in some regions, such as emerging Europe, the impact will be felt far more quickly.

“European banks have huge exposures outside Europe itself,” said Srinivas Thiruvadanthai, an economist at the Jerome Levy Forecasting Center.

“They are being asked to increase their capital base. You can go and raise capital or you go and get a government handout or you shed assets. Raising assets will be very, very tough.”

Euro zone banks will be cutting back on foreign exposure, either out of prudence or under pressure from their regulators.

Austria this week imposed restrictions on its leading banks, including Raiffeisen, Erste Group Bank and Bank Austria in central and eastern Europe, requiring them to make new loans of no more than to 1.1 times the deposits and wholesale funding raised locally.

Romania could see a deleveraging equal to 1.6 percent of GDP, while the Czech Republic, Hungary and Turkey all face hits of about a half a percent of annual output, according to data from Nomura International.

It won’t stop in Europe. About 20 percent of bank assets in Chile, Uruguay and Mexico are controlled by euro area banks.

Less lending by international banks will drive the overall cost of credit up, almost certainly working against official policy which will be trying to reduce rates.

In some areas, like trade finance where some European lenders are prominent, this impact may be felt rapidly, as it was in 2008 when fear of counterparty risk prompted many banks to pull out of trade financing for a time. That had a magnifying impact on the global downturn, as some exports were delayed despite their being willing buyers and sellers at a given price, simply because the letters of credit needed to facilitate the deals fell through.

This will only be intensified by European bank recapitalization proposals, which impose a tight deadline of next June for 70 euro zone banks to find about 100 billion in new capital. And remember, that amount of capital, huge as it is, may prove insufficient given the recent free fall in the value of euro zone sovereign debt, to which euro zone banks have critically high exposure.


Given the difficulty in raising capital directly from investors, euro zone banks are looking to sell whatever they can that will fetch a reasonable price.

Since investors, and their peers, don’t want to buy more European exposure, that means selling off bits and pieces of financial institutions outside the euro zone.

Spanish bank Santander, seeking to boost its core capital to 10 percent by June, said this week it will sell a 7.8 percent stake in Santander Chile, worth around $1 billion dollars.

That deal sent shares of the Chilean affiliate down sharply, increasing the dampening impact on bank valuations there, and ultimately on credit availability.

While the impact in Asia, where continental European banks hold just 5.0 percent of their assets, will be less, it will still be felt, especially in areas already being hit hard, like Hong Kong property development, according to analysts at Barclays Capital.

And the great banking recapitalization of 2012 likely won’t be limited to Europe, as shown by the Federal Reserve’s newly announced stress test of US banks.

Austria‘s move to restrict lending abroad has to be viewed as a kind of economic protectionism, a sort of reverse tariff, but this time on precious bank capital. That sets an extremely risky precedent, but one it is easy to see other euro zone nations following.

If Germany fears the costs of recapitalizing its banks in the event of a euro zone break up, as well it should, a logical step would be for it to try and conserve its national banking resources via similar moves.

That same logic holds, even more chillingly, for countries outside the euro zone. Tight credit, and tight controls on credit, may end up being a leading story of 2012.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Yes, agree. Understandably Austria is not wanting to hold the baby if the bank#s investment turn sour. Not that long ago the Volksbank eastern division was sold to a Russian interest. The stress test proved to be its undoing.

Seeing your opinion in a wider context, the current trajectory of the eurozone seems to be one of battening down the hatches (austerity) for an almighty credit storm. The euro states with relatively more secure finances or fiscal policies have already pointed their ships in that general direction – austerity and to ride out the end of the late, great crdit boom. The credit party is over.

Like musical chairs, some countries will be left standing. No matter how much it is ridiculed, if the eurozone has already set sail under the flag of fiscal discipline, then markets in China, Americas, the UK will feel it. And this may be the existential fear in the market.

Posted by scythe | Report as abusive

Three years the AngloSaxion world has been ridiculing and fingerpointing the EU and our banks. I hope it was fun because now our money comes home. Au revoir. Auf wiedersehen. Vaarwel.

Posted by FBreughel1 | Report as abusive

I don’t even know how I ended up here, but I thought this post was good. I do not know who you are but certainly you are going to a famous blogger if you aren’t already Cheers!

Posted by here | Report as abusive